Is a long-standing workforce-provision contract for a chemical plant's operational staff nontaxable as staff leasing, even though the contractor directs supervision, assumes liability, and can subcontract work?

Plain-English summary

A chemical plant operator had a long-standing (roughly 20-year) contract with a firm that supplies its routine operational workforce -- workers who operate equipment and perform general maintenance and repairs under the plant's supervisors. The plant operator argued the arrangement should be nontaxable because: the plant directs what work is done, the plant can refuse to let a specific worker on-site, the plant generally supplies materials (reimbursing the contractor when it doesn't), and the contract includes holiday pay/benefits and covers a three-year term rather than one specific task. The plant asked the Comptroller to review the actual contract and confirm the arrangement was nontaxable under Rules 3.356, 3.357, and/or 3.364.

The Comptroller disagreed with the nontaxable characterization. Tasks performed under a services contract are taxable if they constitute a taxable service under Tax Code § 151.0101 or the fabrication of tangible personal property. Critically, Rule 3.364(c) excludes independent-contractor arrangements from the staff-leasing category, no matter whether the provider is a licensed staff leasing company -- and several provisions of THIS specific contract pointed to an independent-contractor relationship rather than employee leasing: the contractor furnishes "supervision and labor" (not just labor), the contractor has the sole right to supervise/manage/control/direct the work, the contractor assumes all risks and liabilities from its work, the contract itself distinguishes "taxable" and "nontaxable" invoice amounts, and the contractor may subcontract out construction, turnaround, and temporary work. The plant's own agreement affirmed the contractor was an independent contractor.

What this means for you

Industrial plants and other businesses contracting for on-site operational workforce

Directing day-to-day work and being able to reject specific workers does NOT by itself make a workforce contract nontaxable staff leasing. Look at who holds supervisory control and liability under the contract's actual language -- if the provider retains the right to supervise/manage/direct the work and bears the risk of its own performance, that points toward a taxable independent-contractor services relationship.

Staff leasing and Professional Employer Organization (PEO) companies

Rule 3.364(c) specifically excludes independent-contractor arrangements from staff leasing treatment, regardless of whether your firm holds a staff leasing license. Review your own contract language for supervision, liability, and subcontracting clauses that could tip an arrangement toward independent-contractor status.

Accountants and tax professionals

This letter is a useful checklist of contract-language signals the Comptroller weighed: who furnishes "supervision" (not just labor), who has sole direction/control rights, who bears risk/liability, how invoices distinguish taxable/nontaxable amounts, and whether subcontracting is permitted.

Common questions

Q: Does a client directing the work performed make a workforce contract nontaxable staff leasing?
A: Not by itself, per this letter -- the Comptroller looked at broader contract terms (supervision rights, liability, subcontracting) and found this specific arrangement was independent-contractor services, not staff leasing.

Q: Does Rule 3.364(c) apply to licensed staff leasing companies too?
A: Per this letter, Rule 3.364(c) excludes independent-contractor arrangements from staff leasing "regardless of the status of the contractor as a licensed staff leasing company."

Q: What contract features suggested an independent-contractor relationship here?
A: Per this letter: the contractor furnishing "supervision and labor," the contractor's sole right to supervise/manage/control/direct the work, the contractor assuming all risks/liabilities, taxable/nontaxable invoice distinctions, and permission to subcontract construction/turnaround/temporary work.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101 (definition of taxable services)
• 34 Tex. Admin. Code Rule 3.364(c) (staff leasing excludes independent contractor arrangements)
• 34 Tex. Admin. Code Rules 3.356, 3.357 (referenced by the taxpayer in requesting this ruling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9708641L

Original ruling text

August 8, 1997

Dear ***:

Thank you for your letter concerning the taxability of the provision of an
operational workforce to your ***chemical plant in *****,
Texas.

To support the operations of this plant,***has a long-standing
contract to have personnel provided as the routine operational workforce at
this plant. The workers perform all tasks ranging from operating the equipment
to general maintenance and repairs as directed by ** supervisors. As
a point of reference, this arrangement was in effect prior
to****purchasing the plant approximately 20 years ago.

***feels that the services it is receiving are non-taxable because:

1. *** directs what work will be performed
2. *** has the right to refuse to allow a person to work at the
   plant
3. *** supplies all materials and supplies to be used in
   performing the jobs unless**requests that the contractor provide
   some materials. In the event of this occurring,****will reimburse the
   contractor for costs.
4. The contract also provides for holiday pay and benefits. In a normal
   contract for a specific service, one would not normally see a reference to
   holidays or vacation, that would the responsibility of the contractor.
   *** also reimburses the contractor for all payroll taxes and covers a
   three year period (not for the performance of one specific task).

***would like for the Comptroller's office to review the attached
contract and determine if*****is correct in assuming that the tasks
performed under this contract are non-taxable under Rulings 3.356, 3.357,
and/or 3.364.

Response. Tasks performed under this contract will be taxable if they are for
the performance of a taxable service per 151.0101 of the Texas Tax Code or the
fabrication of tangible personal property.

Please note that although you do not state whether the firm providing the
services is a staff leasing company or not, Rule 3.364 (c) specifically states;
"[S]taff leasing services do not include services provided by an independent
contractor regardless of the status of the contractor as a licensed staff
leasing company. Article VII of your agreement affirms that the contractor is
an independent contractor.

Other indications that the agreement/contract is for the provision of services
and not the provision of employees are;

1. Article I states that the contractor shall furnish "supervision and
   labor."
2. Article III states that the owner's plant managers designate work
   to be done and
3. Article V states that the contractor "shall have the sole right to
   supervise manage, control, and direct the performance of the work hereunder."
4. Article XIII in which the contractor assumes all risks and
   liabilities arising out of or incident to the contractor's work.
5. Exhibit "C" states that the contractor will invoice the owner for
   "taxable" and "nontaxable" amounts.
6. Exhibit "E" states that the contractor may subcontract out
   construction, turnaround, and temporary work.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division